Option Prices, Takeover Announcements, and Stock Returns
Edward J. Podolski
Monash University - Department of Accounting and Finance
Monash University; Financial Research Network (FIRN)
Monash University – Department of Accounting and Finance and Corporate Finance Cluster; Financial Research Network (FIRN)
January 8, 2011
This study contributes to the debate on the information content of option prices. In the context of takeover announcements we examine whether option prices contain information above that reflected in stock prices, or whether consistent with arbitrage-free pricing models options are redundant instruments. Our empirical results confirm that options listings enhance the price discovery role of equity markets, and that both call and put options contain incremental information about impending takeovers. We further report that liquid options are more informative than non-liquid options, and that deal characteristics play an important role in the informativeness of option prices. These findings suggest that the options market contains important implications for extreme informational events.
Number of Pages in PDF File: 45
Keywords: Takeovers, Informed Trading, Market Efficiency, Stock Return Predictability
JEL Classification: G14, G30, G34working papers series
Date posted: January 9, 2011
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